Considering and Evaluating Airport Privatization (2012)

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28 5.1 Specific Strategies Traditional Approach U.S. airports have traditionally financed airport improve- ments with a combination of federal and state grants, PFC revenues, customer facility charge (CFC) revenues, internal capital funds, and the proceeds of bonds. Under this tra- ditional approach, airports are able to maintain control of investments, set standards and perform maintenance, and pursue ongoing capital investments that are consistent with community needs, goals, and objectives. Airports are able to access capital markets efficiently at relatively reasonable prices and implement fees on tenants to recover costs of investments in airport infrastructure that help secure fund- ing when required. Issuing bonds may require management actions to increase revenues, reduce expenses, and mini- mize other capital investments with an overall goal to avoid material impacts on the credit fundamentals of the airport through the period of investment. Publicly operated airports in the United States also have typically used a design-bid-build process, which gives the air- port owner more control over the project, but more exposure to cost overruns and delays as well as increased debt. Project Finance Approach A number of airports have utilized the private sector for full-scale development, operation and maintenance services, and sometimes financed facilities under long-term leases or concessions. This type of arrangement tends to be used when relatively large investments are needed for passenger termi- nals, parking garages, rental car facilities, fuel systems, cargo facilities, general aviation facilities, and other major facilities. At the end of the lease, the ownership and control reverts to the airport owner. Project financing is the most common way to introduce private sector capital while also transferring the risk of repayment. The developer could be entirely private or part of a PPP. Under variants of each model, the developer takes the full economic risk for the investment and opera- tions of the facility. This structure requires that the project have a revenue stream to repay the debt. There are a number of project development privatiza- tion models with different degrees of control and risk for the airport owner, which are summarized in Table 5.1 and described below. • Construction Manager at Risk (CM at risk) is a project delivery method in which a construction manager com- mits to deliver the project within a guaranteed maximum price (GMP). The construction manager acts as consultant to the airport owner in the development and design phases and as a general contractor during the construction phase. Due to the financial commitment, the CM at risk has an incentive to manage and control construction costs to not exceed the GMP. • Master Terminal Concession Developer is a program man- agement approach in which a developer acts as the airport owner’s master lessee and is responsible for developing and managing terminal concession and retail activities, includ- ing merchandising, retail, food and beverage, and some- times advertising services. Typically, the developer is not authorized to operate terminal concessions except in the case of a vacancy. The airport owner and developer share in the revenues under various formulas. Often the developer is required to contribute to a repair and replacement fund to cover certain repair and replacement costs. Examples include Pittsburgh International Airport, Boston Logan International Airport (Terminals B and E), Baltimore/ Washington International Thurgood Marshall Airport, and Cleveland Hopkins International Airport. • Parking Concession Agreements are a program manage- ment approach in which a private contractor is typically C h a p t e r 5 Developer Financing and Operation

29 responsible for all aspects of day-to-day parking opera- tions, including shuttle buses, facility maintenance, and fee collections. As payment for their services, the contractor receives a percentage of the gross revenues from parking operations, but is required to pay the greater of this percent- age amount or a minimum annual guaranteed amount to the airport owner. Therefore, the contractor assumes most of the risk for potential downturns in parking revenues, but also receives greater rewards if there is an unexpected increase in airline passenger traffic. Examples include the airports serving Baltimore/Washington, Dayton, Cleveland, Erie, Honolulu, and Houston (Intercontinental). • Design-Build-Operate-Maintain (DBOM) is a project delivery method in which a single contractor is responsi- ble for designing, constructing, operating, and maintain- ing a facility with financing secured by the airport owner. The airport owner maintains ownership and retains a sig- nificant level of oversight of the operations (as set forth in the contract). Under this model, the risk for construc- tion cost overruns and responsibility for annual operat- ing expenses belongs to the contractor. • Build-Operate-Transfer (BOT) is a project delivery method in which a contractor builds a facility to the specifications set by the airport owner, operates the facility for a specified time period, and then transfers the facility to the airport owner at the end of the contract. In most cases, the con- tractor will also provide some, or all, of the financing for the facility. Therefore, the term of the contract must be sufficient to enable the private partner to realize a reason- able return on its investment through user fees. • Build-Transfer-Operate (BTO) is a project delivery sys- tem similar to the BOT model except that the transfer to the airport owner takes place at the time construction is completed, rather than at the end of the lease period. • Design-Build-Operate-Transfer (DBOT) is a project deliv- ery method in which a contractor partner designs, con- structs, and operates a facility and hands over ownership of the facility to the airport owner after operating it for a specified period of time. Under this model the responsi- bility for construction cost overruns and annual operating expenses belongs to the contractor. • Design-Build-Operate-Maintain and Finance (DBOM/F) is a project delivery method in which a contractor also is responsible for financing the project. Most examples of airport project finance transactions in the United States involve special purpose facilities for single or multi- tenant use, typically an airline, one or more cargo tenants, or rental car companies. The revenues from such special purpose facilities are pledged to pay debt service on the obligations incurred for such special purpose facilities and are not included in general airport revenues. Project finance is also used on behalf of private, third parties that are not tenants of the facilities. Variations and examples of the DBOM/F approach for airports include: – Public-Private Partnership for Terminal Development is a project delivery method in which a special purpose limited liability corporation (LLC) is formed to build, operate, develop, and manage a terminal under a long- term lease. The developer is obligated to pay operation and maintenance expenses and ground rent to the air- port, make facility rental payments sufficient to pay debt service on the bonds, and share distributions from remaining revenues with the airport owner. An exam- ple is the $1.4 billion Terminal 4 at John F. Kennedy International Airport. – Single Tenant Special Facility Terminal Lease is a project delivery method in which an individual air- line finances the construction of portions of or entire terminals. Typically, these improvements are financed under special facility bonds arrangements to allow the airline to access tax-exempt private activity debt to lower the financing costs. Under special facility bonds, the debt is issued by either the airport owner or another governmental entity, which maintains the public purpose of the project and allows the bonds to be treated as tax-exempt debt. The conduit issuer Transfer at End of Approach Design Build Operate & Maintain Finance Construction Lease Construction Manager at Risk ♦ ♦ ♦ Terminal Concession Developer ♦ ♦ ♦ ♦ ♦ Parking Concession Agreements ♦ ♦ ♦ ♦ ♦ Design-Build-Operate-Maintain ♦ ♦ ♦ ♦ Build-Transfer-Operate ♦ ♦ ♦ Build-Operate-Transfer ♦ ♦ ♦ ♦ Design-Build-Operate-Transfer ♦ ♦ ♦ ♦ Design-Build-Operate-Maintain and Finance ♦ ♦ ♦ ♦ ♦ Table 5.1. Project finance approaches.

30 retains no contingent liability for the bonds because the bonds are secured solely by special facility rentals and sometimes a corporate guarantee by the tenant. Airline special facility bonds have been used to finance hangar and maintenance facilities, cargo buildings, and ground equipment support facilities for the exclu- sive use of an airline. Examples include Boston Logan (Delta/Terminal A, US Airways/Terminal B), Chicago O’Hare (United/Terminal 1), Cincinnati Northern Kentucky (Continental/Terminal 3 and Concourse B), Cleveland Hopkins (Continental/Concourses C and D), Los Angeles (American/Terminal 4, Delta/Terminal 6), Newark (Continental/Terminal C), New York’s John F. Kennedy (United/Terminal 7, American/Terminal 8), and San Francisco (United/Terminal 3), among others. – Multi-Tenant Special Facility Terminal Lease is a proj- ect delivery method in which an airline consortium has financed an entire terminal, including Terminal One Group Association (TOGA) at JFK and Terminal 5 at Chicago O’Hare (the international terminal). – Special Facility Fuel System Leases are a project delivery method in which a special purpose corporation is created for the exclusive purpose of developing and operating the jet fuel storage and distribution system at an airport under a long-term fuel system lease. Membership in the consortium is open to all airlines serving the airport that accept the interline agreement, receiving fueling ser- vices on a non-discriminatory basis. The fuel consortium collects user fees from all air carriers using the facility. Fees are calculated on a residual basis to pay operating expenses, facilities rent (i.e., debt service), and ground rent. Charges are pro-rated primarily based on gallons of fuel delivered. Consortium airlines receive lower rates (non-members typically pay a 50% premium), but are subject to a residual interline agreement, which has a step-up provision that requires members to loan the fuel consortium their share of a defaulting member’s unpaid amount. Examples include Boston Logan International Airport, Los Angeles International Airport, Oakland International Airport, Orlando International Airport, and San Francisco International Airport. – Second Party Cargo Development is a project deliv- ery method in which an airport enters into a long-term ground lease with a cargo integrator such as FedEx and UPS. For example, at the primary express cargo hubs in Memphis and Louisville, cargo processing facilities have been financed primarily through special facility bond financing secured by FedEx and UPS, respectively. However, in both instances a substantial amount of general airport revenue bond debt also was issued for airfield, land acquisition, and other related facilities that were critical to the cargo carriers’ operations. – Third Party Cargo Development is a project delivery method in which an airport owner enters into a long- term ground lease (typically 30 years) with a third party developer to design, construct, and operate a cargo han- dling facility. In some cases the third party develops the cargo facility for a single tenant where the term of the ten- ant’s lease may or may not be coterminous with the third party’s lease. – Private Development of Consolidated Rental Car Facility is a project delivery method in which a private developer, on behalf of the rental car companies, takes the lead on the design, construction, and financing of the project. The project is financed with special facility revenue bonds that are secured solely by CFCs charged to rental car patrons and sometimes rent paid by the rental car companies.17 Examples include Ted Stevens Anchorage International Airport and Austin-Bergstrom International Airport. This is a relatively new variation on the more traditional approach where the airport owner takes the lead in designing, financing, and constructing the facility that is financed with standalone CFC debt. Under private development, the airport owner helps to define the scope, but does not take responsibility for the development or delivery of the facility. This is seen as a means to expedite the project delivery and transfer the construction risk to the private developer. – Private Parking Development is a project delivery method in which an airport awards a long-term contract to a contractor for the development and operation of airport parking facilities. Under the terms of these con- tracts the contractor may be responsible for designing, building, operating, and maintaining the public parking facilities, or some combination of these tasks. The lease typically provides that the contractor (1) make sched- uled minimum annual payments to the airport owner as well as additional payments based on performance and (2) guarantee payment of the debt service from bonds issued to develop parking facilities (usually special facil- ity bonds). Given the significant profit derived from parking operations, this is not a common approach, but has been used in Gulfport-Biloxi, Hartford, New Orleans, and Providence. – Private Solar Development is a project delivery method in which an airport awards a long-term contract to a contractor to design, finance, install, and operate solar photovoltaic systems on the airport, which generate 17A rental car Customer Facility Charge (CFC) is a per transaction day, or a per transaction, charge imposed on the rental car customer by the airport, collected by the rental car companies, and remitted by the rental car companies to the airport. Imposition of a CFC has been key to the financing of consolidated rental car facilities.

31 power for the airport’s use and the airport owner agrees to purchase the power at a fixed rate for the period of the contract through a power purchase agreement or PPA. Airports can realize significant reductions in power costs under these arrangements, although some airports have undertaken solar development themselves to realize these gains, which include renewable energy credits or RECs. Typically the economics of these developments only work for the contractor if it is able to access federal investment tax credits (or grants) for the capital cost of the project. The term of these agreements tends to be 15 to 20 years, which is the economic life of the panels. The solar photovoltaic systems require large amounts of space on an airport, but are placed in areas that do not interfere with the airport’s operations. This type of arrangement has been used at airports serving Denver, Fresno, and Bakersfield. 5.2 Examples of Developer Financing and Operation There has been a wide variety of developer financing and operation employed in the United States as illustrated by the following examples. 5.2.1 Single Tenant Special Facility Terminal Leases Individual airlines have privately financed the construc- tion of portions of or entire terminals, including at: • Boston Logan (Delta/Terminal A, US Airways/Terminal B) • Chicago O’Hare (United/Terminal 1) • Cincinnati Northern Kentucky (Continental/Terminal 3 and Concourse B) • Cleveland Hopkins (Continental/Concourses C and D18) • Los Angeles (American/Terminal 4, Delta/Terminal 6) • Newark (Continental/Terminal C) • New York’s John F. Kennedy (United/Terminal 7, American/Terminal 8) Typically these improvements are financed under special facility bonds arrangements to allow the airlines to access tax-exempt private activity debt to lower the financing costs. Under special facility bonds, the debt is issued by either the air- port owner or another governmental entity, which maintains the public purpose of the project and allows the bonds to be treated as tax-exempt debt. The conduit issuer retains no contingent liability for the bonds because the bonds are secured solely by special facility rentals and sometimes a cor- porate guarantee by the tenant. Airline special facility bonds have been used to finance various types of facilities, including unit terminals or portions of passenger terminals, hangar and maintenance facilities, cargo buildings, and ground equip- ment support facilities for the exclusive use of the airline. During the most recent round of airline bankruptcies in 2003 and 2004, a number of these special facility bond leases were rejected by certain airlines under the Chapter 11 bankruptcy laws while the associated ground leases were accepted resulting in a situation where the airline contin- ued to use the facility and only pay ground rent but not debt service. This action on the part of the bankrupt airlines, led to a series of lawsuits by bondholders. (See Section 5.4.3 for more detail.) Although there have been fewer issues of single tenant spe- cial facility financings since these lawsuits, the outcomes from these lawsuits have provided guidance on how leases should be structured in the future to avoid such a re-characterization in a bankruptcy setting. For example, in December 2009 there was a $150 million special facility bond financing for Delta Airlines to refinance bonds issued in 2000 that were used to fund the costs of acquisition, construction, and installa- tion of certain airport facilities for Delta at Atlanta Hartsfield International Airport. In addition, in August 2010, there was a $30 million financing for US Airways’ facilities at Philadelphia International Airport (ground support equip- ment maintenance facility, cargo improvements, terminal baggage handling systems, and updating and renovating offices and crew rooms). 5.2.2 Multi-Tenant Special Facility Terminal Leases In some cases, airline consortiums have financed entire terminals, including TOGA at JFK and Terminal 5 at Chicago O’Hare (the international terminal). TOGA was formed as a limited partnership to lease, finance, construct, maintain, and operate Terminal One at JFK Airport. The facility, which serves international passengers only, was completed on time and within budget in 1998. TOGA is owned by four airlines, each holding an equal interest in the partnership—Lufthansa, Japan Airlines, Air France, and Korean Air. The tax-exempt special facility bonds for Terminal One were issued by the New York City Industrial Development Agency (IDA) on behalf of TOGA. As part of the financing, TOGA entered into a site lease with the Port Authority of New York and New Jersey for the Terminal One site. The four airline partners entered into individual facility use and lease agreements with 18In the development of Concourse D at Cleveland in 1997, the City decided it wanted to retain the right to award the concessions in the new concourse. Therefore, the non-airline areas of the concourse were financed with general airport revenue bonds and are not part of Continental Airlines’ special facility leased premises.

32 TOGA. These airlines are ultimately responsible on a joint and step-up basis for paying all of the facility’s fixed and vari- able costs, including debt service on the special facility bonds that financed the terminal. Terminal One was developed as a multi-use airline terminal with 640,000-square feet and 11 aircraft gates, and is one of nine airline terminals located within JFK’s central terminal area complex. The lease struc- tures to accomplish these transactions can be quite compli- cated as illustrated in Figure 5.1. 5.2.3 Special Facility Fuel System Leases BOSFuel is a special purpose corporation created for the exclusive purpose of developing and operating the jet fuel storage and distribution system at Boston Logan International Airport under a fuel system lease that expires in 2039. Membership in the consortium is open to all air- lines serving the airport that accept the interline agreement, while fueling service is available to all carriers serving the airport on a non-discriminatory basis. BOSFuel collects user fees from all air carriers using the facility, calculat- ing the fees on a residual basis to pay operating expenses, facilities rent (i.e., debt service), and ground rent. Charges are pro-rated primarily based on gallons of fuel delivered. Consortium airlines receive lower rates (non-members pay a 50% premium), but are subject to a residual interline agreement, which has a step-up provision that requires members to loan BOSFuel their share of the unpaid amount if any member defaults. In 2009, there were more than 20 airline members of BOSFuel, accounting for over 90% of total fuel volume at the airport.19 Similarly, SFO Fuel Co. LLC (SFOFuel) is a single-purpose, limited liability company that was created in 1997 to lease, construct, operate, and maintain the exclusive jet fuel facili- ties at San Francisco International Airport. The company issued bonds totaling approximately $125 million to con- struct improvements to the consolidated fuel distribution facility. Like BOSFuel, the special facility bonds are secured solely by payments to the Airport Commission by SFOFuel from facilities rent collected from the airlines, including an unlimited step-up provision for the sharing of capital and operating expenses among the 40 member airlines in the event of any member default. A number of other airports have similar airline fuel system consortia that were created to develop and oper- ate jet fuel systems, including Los Angeles International Airport, St. Louis International Airport, and Anchorage International Airport. Source: “New York City Industrial Development Agency's (IDA) special facility revenue bonds series 2005, issued for the Terminal One Group Association LP (TOGA),” Standard & Poor's Ratings Services, October 31, 2005. Figure 5.1. Terminal One Group Association transaction legal structure. 19Fitch Downgrades $103MM MassPort Rev Bonds for BosFuel to ‘BBB’ from ‘A-’; Outlook Stable, The Bond Buyer, February 10, 2010.

33 5.2.4 Third Party Cargo Development Cargo facility development can be accomplished by (1) the airport owner, (2) a second party who develops and sub- sequently occupies and uses the facility, (3) a third party who develops the facility but does not occupy or use it, (4) a contractual arrangement where the development and man- agement of the property is shared by the public and private sectors, or (5) a combination of these strategies. Third party airport cargo development is quite prominent in the United States today across all airport sizes and forms of governance, including at Boston Logan, Chicago O’Hare, Dallas–Fort Worth, Harrisburg, JFK, Miami, Pittsburgh, San Antonio, Seattle, Washington Dulles, and others. Airports enter into long-term ground leases (typically 30 years) with third party developers to design, construct, and operate a cargo handling facility. The third party finances the cargo building and associated truck dock and vehicular parking while the aircraft apron and road improvements are usually funded through a combination of federal, state, local, and private funds. Often the third party financing is accomplished with tax-exempt special facility bonds issued by the airport or another public agency on behalf of the third party developer. These special facility revenue bonds are repaid solely from revenues generated by the facility, as collected by the third party developer from tenants of the project. The rating for these bonds is based on the financial strength of the tenant, guarantees of a third party (e.g., bond insurer), or the level of demand for cargo facilities and the availability of other facili- ties on or near the airport instead of the airport as a whole. As a result, these bonds carry a higher interest rate than general airport revenue bonds. There are three types of third party cargo financings— single tenant, multi-tenant, and pooled assets. • Single Tenant: There are a number of examples of cargo financings accomplished under long-term leases with integrators such as FedEx and United Parcel Service (UPS). For example, at the primary express cargo hubs in Louisville and Memphis, cargo processing facilities have been financed primarily through special facility bond financing secured by UPS and FedEx, respectively. However, in both instances a substantial amount of gen- eral airport revenue bond debt also was issued for airfield, land acquisition, and other related facilities that were critical to the cargo carriers’ operations. • Multi-Tenant: Multi-tenant cargo financings, on the other hand, often involve shorter term leases with a number of cargo operators and freight forwarders and usually these bonds are unrated and privately placed. In one of the larger multi-tenant third party cargo developments, the City of Denver, the owner and operator of Denver International Airport, entered into a 30-year ground lease with a third party developer, WorldPort at DIA Owners LLC, to design, construct, and operate a cargo handling facility on 70 acres of airport property in 2000. The proposed $100 million cargo development (called WorldPort at DIA) was envi- sioned to consist of seven buildings (500,000 square feet), a new taxiway, and an aircraft ramp to be developed in phases. Two 60,000-square-foot buildings were completed in 2002, but as of 2010 only one of them had tenants. The other buildings were never constructed. The city issued special facility bonds to finance the construction on behalf of the developer, but those bonds were paid off. In 2008, the city paid JPMorgan Chase $4 million for WorldPort, which represented 12.5% of the estimated $32 million that former owner Lehman Brothers invested in the project. Lehman was the project’s initial primary investor, but Lehman transferred WorldPort to JPMorgan Chase, which had guaranteed the bonds used to build WorldPort. World- Port opened right after the Sept. 11, 2001, terrorist attacks, which led to a decline in air cargo shipments both in Denver and nationwide that contributed to the lack of tenants along with a fundamental shift to integrators (e.g., FedEx and UPS) who began to transport more freight by truck instead of air. • Pooled Assets: The first pooled asset special facility cargo financing took place in 2002 when Cargo Acquisitions Companies Obligated Group, consisting of Aeroterm US Inc. and its financial partner Greenfield Partners (a pri- vate equity fund in Norwalk, Conn.) sold $73.5 million to finance the acquisition of long-term leases from other third party developers at nine different airports. Combining the financing for cargo leases at nine airports into a single cross-collateralized bond issue permitted an investment grade rating. If the lease acquisitions had been financed individually, the bonds most likely would not have been rated. According to Mary Francoeur, senior vice president of Moody’s at that time: “It removes a single asset risk that would normally be associated with one cargo property. It gives the structure some diversity.”20 Another noteworthy cargo facility development at Washing- ton Dulles Airport involved a unique financing arrangement between the Metropolitan Washington Airports Authority (MWAA) and AFCO (the cargo developer). Under the 24-year lease, MWAA loaned AFCO $2 million for infrastructure improvements as part of the development (in addition to spe- cial facility financing for the cargo building) where the amor- tization of the loan principal and interest were not payable 20Michael McDonald, Unprecedented Air Cargo Deal Uses Nine Separate Authorities, The Bond Buyer, March 12, 2002.

34 until years 16 through 24 when the developer was in a position of making a profit on the development. 5.2.5 Private Development of Low-Cost Airline Terminal Development In 2007, the City of Austin, the owner and operator of Austin- Bergstrom International Airport, recognized an emerging niche and marketing opportunity and set out to attract an ultra-low- cost Mexican airline, after seeing the implementation of this successful airline business model in Europe (Ryanair) and Asia (AirAsia) and the debut of Skybus in the United States. After contacting Mexican airline VivaAerobus, the airport realized that to compete for their service, the city would need to pro- vide a low-cost, no frills terminal as an alternative to the exist- ing terminal that catered to full-service airlines. The city had two primary goals in developing this new facility—(1) it needed to be constructed quickly to respond to this market opportunity and (2) it wanted to reduce its risk in the event the airline was not successful or stopped serving the airport. Therefore, the city decided to enter into a part- nership with General Electric’s subsidiary, GE Commercial Aviation Services (GECAS), to develop and operate a no frills, one-story terminal building (previously owned by the National Guard) with no jetways or complex baggage system and with common use holdrooms, gates, and ticket coun- ter areas. GECAS also operated the parking and rental car facilities at the terminal, while the city operated the airfield and security. Due to the lower level of service provided at the South Terminal, rental rates were priced at roughly half of the rates paid by the airlines in the main terminal. However, all airlines paid the same landing fee rates. The 20-year lease between the city and GECAS was structured to allow GECAS to recoup its $6 million investment in the South Terminal facilities before the city would began sharing in the revenues. In May 2008, the low-cost, no frills South Terminal opened as the first facility constructed in the United States dedicated to accommodate ultra low-cost airlines. However, the nega- tive impact on air travel resulting from a combination of the swine flu virus, the deep economic recession, and Mexican drug wars caused VivaAerobus to suspend its service from Austin in June 2009 and GECAS turned the facility back to the city. Although the South Terminal has been temporarily closed until a new ultra-low-cost carrier can be recruited to begin service, the city achieved its goals of speedy develop- ment of the facility to exploit a marketing opportunity and minimal financial risk by engaging a private company to par- ticipate in this development venture.21 5.2.6 Private Development of Consolidated Rental Car Facility Ted Stevens Anchorage International Airport. In 2005, Venture Development Group, LLC (an Alaska commercial real estate development company), contracted to develop a new $57 million consolidated rental car facility at Ted Stevens Anchorage International Airport under the terms of a memorandum of understanding with the rental car companies operating at the airport, the state of Alaska (the owner and operator of the airport), and the Alaska Industrial Development and Export Authority. Venture Development was responsible for the design, construction, and delivery of the project and the Alaska Industrial Development and Export Authority issued the taxable revenue bonds used to finance the facility. The bonds are payable solely from and secured by a pledge of the revenues derived from the daily CFC collected by the rental car companies from their cus- tomers, and certain funds and accounts held by the trustee under the bond trust indenture. The state rented the devel- opment site to the Anchorage RAC Center, LLC, an Alaska limited liability company and special purpose entity, which manages, operates, and maintains the consolidated facility for use by the rental car companies under subleases.22 Austin-Bergstrom International Airport. Since its open- ing in 1999, rental car staging and ready return space have been located on the third level of the terminal parking garage at Austin-Bergstrom International Airport. These facilities were financed with taxable special facility revenues bonds paid for with rental car CFCs. Each rental car company also operates a remote, on-site service center, located approximately one mile northwest of the terminal. The first two levels of the garage are used for public parking. As passenger traffic increased, it became apparent that there was a need for additional rental car staging and ready return space as well as additional cov- ered public parking within walking distance to the terminal building. In 2010, airport officials and rental car company represen- tatives mutually agreed that the best way to solve the issue was to build a new, three or four level parking garage and con- solidated rental car facility on a surface parking lot located immediately behind the existing terminal parking. This will allow the airport to convert the third floor to public park- ing and to develop a consolidated facility for rental car ready return and quick turnaround areas (vehicle fueling, cleaning and storage facilities) within walking distance to the terminal 21Interview with Jim Smith, Airport Director of Austin-Bergstrom International Airport, August 12, 2010; and ACRP Report 20: Strategic Planning in the Airport Industry, January 2010. 22Official Statement, Alaska Industrial Development and Export Author- ity, Taxable Revenue Bonds (Rental Car Facility Project at Ted Stevens Anchorage International Airport), September 2005.

35 to avoid the need for busing of rental car customers and to reduce the need for the rental car companies to ferry vehicles back and forth between the terminal and the remote service centers. The rental car companies requested permission to take the lead on this project, using a public–private partner- ship business model. The city agreed to allow the rental car companies to lead the design, construction, and financing of this project to expedite the project delivery. It is expected that the facility will be funded with special facility revenue bonds secured by the CFC revenues.23 5.2.7 Public-Private Partnership for Terminal Development JFKIAT was formed in 1997 in partnership with the Port Authority of New York and New Jersey, to build, oper- ate, develop, and manage the new $1.4 billion Terminal 4 at John F. Kennedy International Airport to replace the old International Arrivals Building (IAB) that had been oper- ated by the Port Authority since 1957. Initially JFKIAT was a joint venture of LCOR JFK Airport LLC, Schiphol USA Inc., and Lehman JFK LLC, but is now owned by Schiphol USA (a Schiphol Group Company) and Delta Air Lines, which bought a non-majority, non-controlling stake in JFKIAT in April 2010. JFKIAT assumed responsibility for the opera- tion of the IAB and development of the new terminal in April 1997 concurrent with the financial closing of the spe- cial facility bonds issued to finance the project. The lease term expires 25 years after the date of beneficial occupancy of the new facility. The 1.5-million square-foot Terminal 4 opened at JFK in May 2001. Under the lease with the Port Authority, JFKIAT is obligated to pay certain operation and maintenance expenses and ground rent to the Port Authority, make facility rental payments sufficient to pay debt service on the bonds, and distributions from remaining revenues. Unlike the cost-recovery pricing methodology used at most U.S. airports, JFKIAT imposes differential pricing that rec- ognizes the value to airlines of access to the facilities during peak periods and the value to JKFIAT of longer term, fixed lease commitments. These rates are generally set to reflect market-based competitive rates for rents and fees.24 Terminal 4 is one of the largest terminals in the New York area serv- ing 40 international and domestic airlines and 9.5 million passengers in 2009.25 JFKIAT is the only private, nonairline company to operate a terminal at JFK. In August 2010, the Port Authority announced its approval of a $1.2 billion expansion of Terminal 4 to accommo- date Delta’s international operations. The project includes expanding Concourse B at Terminal 4 to add nine new inter- national gates, constructing a passenger connector between Terminal 2 and Terminal 4, expanding areas for baggage claim and Customs and Border Protection, and demolish- ing Terminal 3. The existing Terminal 3 site will be used for aircraft parking. Delta also would continue to use Terminal 2 for domestic operations. The project would be financed with about $900 million of special project bonds (secured by the lease on the expanded terminal), $75 million of equity from Delta, $215 million of PFCs, and TSA grants.26 5.2.8 Private Parking Development Although most airport owners finance parking facilities using airport funds or bonds, a few airports have awarded long-term contracts to private entities for the development and operation of airport parking facilities (e.g. Gulfport- Biloxi, Hartford, New Orleans, and Providence). Under the terms of these contracts the private entity may be responsible for designing, building, operating, and maintaining the pub- lic parking facilities, or some combination of these tasks. The primary reasons for considering this type of an arrange- ment include: 1. To improve net revenues and preserve airport capital by developing new parking facilities without using airport funds, 2. To receive a large up-front payment, 3. To reduce airport staff time required to oversee and/or manage the parking operation, and/or 4. To reduce risks associated with funding new parking facil- ities using airport-supported bonds.27 Bradley International Airport. On April 6, 2000, the State of Connecticut (the owner and operator of Bradley Inter na- tional Airport serving Hartford, Connecticut) issued $47.7 mil- lion in conduit special facility parking revenue bonds to finance the costs of a new parking garage. In connection with issuance of these bonds, the state entered into a parking lease under which the parking operator (APCOA/Standard Parking, Inc.) was obligated to construct and operate the parking garage as well as all state-owned surface parking facilities through 2025. 23Interview with Jim Smith, Airport Director of Austin-Bergstrom Inter- national Airport, August 12, 2010; and Austin City Council Agenda, Aviation item No. 5, Recommendation for Council Action, July 29, 2010. 24Official Statement, the Port Authority of New York and New Jersey, Spe- cial Project Bonds, Series 6, JFK International Air Terminal LLC Project, April 25, 1997. 25JFKIAT, LLC News Release, July 28, 2010. 26Port Authority of New York and New Jersey, Committee on Operations, Minutes of Special, Interim Meeting, August 5, 2010; and N.Y.-N.J. Port Authority Approves JFK Terminal Expansion, The Bond Buyer, August 6, 2010. 27ACRP Report 24: Guidebook for Evaluating Airport Parking Strategies and Supporting Technologies, October 2009.

36 The lease provides that APCOA make scheduled minimum annual payments to the state and additional payments based on performance. Under the terms of the parking lease, APCOA has guaranteed payment of the debt service from the parking garage bonds and the scheduled annual payments to the state. The state has not pledged any airport revenues towards this debt. 5.2.9 Airport Industrial Park Development Alliance Airport was developed in a public/private part- nership between the City of Fort Worth, Alliance Air Ser- vices, and the FAA. The airport is owned by the City of Fort Worth and managed by Alliance Air Services, a subsidiary of Hillwood Development Company LLC, a real estate develop- ment company owned by H. Ross Perot, Jr. Hillwood dedi- cated 418 acres to the City for airfield (runway/taxiway) use and the surrounding 3,000 acres are privately owned for use as an industrial airpark. The airport opened on December 14, 1989 and does not serve passenger traffic. Although airside-related land use is not profitable, lands devoted to industrial use are the most profitable property on general aviation airports. As a result, Hillwood retained property that would generate more profit than non-airport related industrial land uses (because of the land’s associa- tion with, and proximity to, the airport). Hillwood donated land for the airport and relied upon the overall success of the land development project surrounding the Alliance Airport, which appears to be succeeding. According to a 2009 report: Since 1990, approximately 28 million square feet of space has been developed at Alliance, with most owned and managed by Hillwood. The Alliance area houses more than 150 companies and, as of January 2007, created over 27,000 jobs. Much of the development is industrial space to capitalize on the proximity of Alliance Airport. Alliance is far from completion, with only 5,500 developed out of a total of 17,000 acres. At full build-out, the development is projected to house 88 million square feet of commercial space and employ 92,000 workers.28 5.2.10 Airport Light Rail Extension In 1997, the Tri-County Metropolitan Transportation District (Tri-Met) and the Port of Portland (Port), owner and operator of Portland International Airport, wished to build a 5.5 mile extension of the existing regional light rail system to the Airport. However, under federal regulations, airport owners can only pay for the portions of air-rail exten- sions that are on airport property (or right-of-way) and that transport passengers to the airport. A portion of the proposed airport extension was off-airport and funding needed to be secured for that segment. Therefore, the Port proposed a creative solution whereby it participated in the rail exten- sion project, which was jointly developed by the Port, Tri- Met, Cascade Station Development Company (Cascade), and the Portland Development Commission (PDC).29 The extension was segmented into three parts based on financial responsibility: 1. The Port was responsible for the cost of 1.2 miles of track from the airport’s Portland International Center (an office and industrial park on airport) and construction of a tran- sit station and a covered center platform on the deplaning level of the terminal, the cost of which totaled $43 million. The Port used PFC revenues to fund its share of this cost. 2. The second 1.4-mile segment of the Airport MAX proj- ect, from the eastern boundary of the airport through the Portland International Center, was funded by PDC in exchange for the right to develop land in the Portland International Center. The development rights were then assigned by PDC to Cascade, which created Cascade Station, a 120-acre mixed-use development with over a million square feet, including retail, hotels, and offices, and was responsible for construction of streets, parking, park areas, an overpass, and other road improvements. The Port agreed to contribute, from funds other than PFC revenue, $7 million toward the cost of the overpass. Two transit stations, funded from local and regional sources, are located within the Portland International Center. 3. In exchange for the development rights, Cascade pays PDC assignment fees, which PDC assigned to Tri-Met to repay bonds issued by Tri-Met to finance a portion of the remaining 2.9-mile portion of the Airport MAX extension that is located off-airport property. The Airport MAX opened in September 2001. 5.3 Legal and Regulatory Considerations The primary interests of the U.S.DOT and the FAA are to ensure that the airport owner and the developer comply with relevant legislation, regulations, and policies. Chief among these are compliance with grant assurances, the rates and charges policy, environmental regulations, and PFC regula- tions (if applicable). 28Texas Motor Speedway Area Master Plan, Chapter 1: Background, January 2009. 29The Portland Development Commission is the urban renewal agency created by the city of Portland to promote development, housing projects, and economic development within the city’s urban renewal districts.

37 Regarding grant assurances and the rates and charges pol- icy, the following requirements are relevant: 1. Assurance 22 requires the airport sponsor to make the air- port available for public use on reasonable terms and with- out unjust discrimination. Therefore, rates and charges levied on airlines for services and facilities provided by the developer must be “fair and reasonable” and the airlines cannot be subjected to “unjust discrimination” in fees and operating conditions, unless otherwise agreed to by the airline. Because the airport owner must assure compliance with federal statutes, it is necessary for the airport owner to include in the lease the requirement that the developer must provide fair and reasonable fees and avoid unjust discrimination. 2. Assurance 23 prohibits an airport sponsor from granting an exclusive right to conduct an aeronautical activity at the airport. This prohibition applies only to aeronautical activities. It does not prohibit monopolies in, for example, car rentals, parking, and concessions. 3. Assurance 24 requires the airport sponsor to impose rates and charges in such a manner and at such levels as to make the airport as self-sustaining as possible under the cir- cumstances. For example, airport sponsors must charge a minimum of fair market value to lease property for non- aeronautical use, but have considerable flexibility, subject to Constitutional standards, to charge higher amounts for rent and other fees.30 4. Assurance 25 requires the airport sponsor to use airport revenue only for the capital and operating costs of the airport, the local airport system, or other local facilities owned or operated by the airport sponsor and which are directly and substantially related to the air transportation of passengers or property. A developer financing transac- tion would be subject to federal evaluation at least with respect to the self-sustaining assurance to insure the pay- ments to the developer do not exceed the fair and reason- able value of its services or otherwise fail to comply with the Policy Concerning the Use of Airport Revenue. The FAA can investigate if there has been a violation with or without a formal complaint and can issue an order pro- posing enforcement action (e.g., reasonable rates and charges). Sanctions include, among others, withholding future grants and withholding payments under existing grants. 5. Grant repayment—Another consideration is when the proposed development requires the removal or demoli- tion of any improvement funded in whole or in part with AIP grants. If so, there may be a requirement to repay the federal government for the unamortized value of its invest- ment in the facility or to replace the facility. For example, the FAA consented to the demolition of the IAB at JFK for the Terminal 4 development subject to the requirement that grant-funded facilities in the IAB were replaced with “like or superior” facilities. 6. Exclusive use—Any improvement funded with AIP grants cannot be leased on an exclusive use basis to a developer (or any other tenant). For example, if an airport uses AIP grants to construct a cargo apron and enters into an agree- ment with a developer to construct a cargo building that is contiguous to the apron, the apron cannot be used exclu- sively by the developer and its tenants. Regarding environmental requirements, any actions required under the National Environmental Policy Act of 1969 must be completed. For example, if there is a need for an environmental assessment or environmental impact statement, the FAA will need to approve them. In the case of the Terminal 4 development at JFK, the FAA provided a categorical exclusion from the requirement for an environ- mental assessment and approved an updated airport layout plan including the redeveloped terminal. In addition, the project needs to appear on an approved airport layout plan (ALP) and the appropriate airspace find- ing must be made by the FAA. If PFCs are used to help fund the project, the airport owner must also ensure that the developer complies with all provi- sions under the PFC regulations (14 CFR part 158). In addi- tion to the environmental, ALP, and airspace requirements noted above, if PFC revenues are used, the developer cannot: • Enter into an exclusive long-term (defined as five years or longer) lease or use agreement with an air carrier or foreign air carrier for projects funded by PFC revenue • Include in the rate base (e.g., through depreciation or amor- tization) that portion of the capital costs of a project paid for by PFC revenue for the purpose of establishing a rate, fee or charge pursuant to a contract with an air carrier or foreign air carrier It is important to note that each state has its own unique set of laws and regulations. When contemplating privatization options, it is important to undertake a comprehensive review of these laws. For example, as found in the Boston Terminal A case study, given the unique public bidding requirements in Massachusetts, accessing tax-exempt conduit financing for private development was deemed infeasible. Once the airport owner determined that private developers needed tax-exempt debt, it had to seek other avenues for private par- ticipation in the project. 30Such as the permissive standards applied to privilege fees for rental car companies.

38 5.4 Evaluation of Developer Financing and Operation The reasons why an airport might consider developer financing and operation include: • Preserve financial capacity for other essential airport devel- opment (e.g., terminals, runways, taxiways, and roadways) • Avoid unnecessary risks (economic and political) • Accelerate the development timeline and reduce project costs by avoiding the requirements of public bidding and approval procedures • Limit the airport’s administrative burden and need to hire additional staff to handle facility financing, bidding, design, and construction oversight as well as ongoing marketing, operation, and maintenance expenses These factors must be tempered by the airport owner’s loss of control over the land and facility (tenants, appearance, maintenance, etc.) and the unrealized potential for upside revenue generation, although some of the development leases include revenue sharing provisions. 5.4.1 Opportunities Some of the opportunities cited for developer financing and operation include: • Reduces reliance on municipal debt and conserves pub- lic capital for those areas where public funding is the only alternative • Transfers risk exposure for cost overruns, delays, and debt repayment to the private sector • Has potential to reduce operating expenses and increase operational efficiencies due to avoidance of public pro- curement processes and to private sector motivations and incentives • Accesses private sector expertise for specialized functions and commercial development • Attains the latest technical and managerial expertise for the infrastructure project • Applies private sector techniques to accelerate project delivery and reduce construction costs • Can enhance commercial development revenues • Creates/retains jobs for the local economy 5.4.2 Advantages The major advantages cited for developer financing and operation include: • Preserves general airport revenue bond debt capacity for essential airport development • Avoids unnecessary risks for airport owner • Accelerates project delivery and may reduce construction costs However, as found in the JFK Terminal 4 case study, although the terminal was completed on-schedule, the final project cost was about 20% higher than the budgeted cost. • May bring about improved efficiency and may reduce ongoing operating expenses, which would provide low-cost facilities to tenants (especially when tax-exempt financing is employed) • Limits administrative burden of airport and staffing respon- sibilities for facility financing, bidding, design, construction oversight, marketing, ongoing maintenance, administra- tion, and management • Minimizes or eliminates delays from local procurement policies that tend to delay contract awards There is strong sentiment by U.S. airport managers that they can do as good a job, if not better, than private opera- tors if they were unburdened by cumbersome, rigid regula- tions and processes. Nevertheless, some airport managers expressed frustration with the lack of speed when under- taking public projects and the inherent problems associ- ated with the many local requirements to accept the lowest bid. Under a developer financing transaction, there is no low bid requirement and the project can be constructed on an expedited basis. • Allows airport management to focus on other strategic issues and assets 5.4.3 Disadvantages The major disadvantages cited for developer financing and operation include: • Involves considerable time and effort for bidding process and negotiation of complex legal documents • Requires that the project have a revenue stream to repay the debt • Provides airport less control over the project and facility management • Loss of control over the development site and future capac- ity expansion As discovered in the JFK Terminal 4 case study, the long-term lease meant that control over the largest ter- minal site on the airport and the flexibility to respond to changing market conditions was relinquished by the airport owner (the Port Authority of New York and New Jersey or Port Authority). While this factor was not important in the early years of operation, it became a more important consideration later on. From a customer service perspective, replacing Terminal 3 was a top pri- ority for the Port Authority, and expanding Terminal 4 was the logical and most economically viable solution. However, the Port Authority only had indirect influence

39 on the outcome of negotiations between Delta and JFKIAT, two parties with competing financial interests. • Loss of flexibility to change land uses over period of lease • Less control over types of activities and quality and appearance • Involves considerable upfront planning, time, and expense • Involves moderate implementation risk • Less control of facility utilization especially under airline- financed terminals that run the risk of inefficient utilization of gates and associated terminal space • Could involve organizational disruption and need to reas- sign or terminate existing employees • Could involve buyouts and compensation for existing public workers • Involves long-term risk if the project encounters financial problems, i.e., the airport may need to step in (even though it is not financially obligated to do so) to preserve the use of the facility and associated airport capacity • Can expose the airport to political, legal, operational, and financial risk if the transaction is not consummated or if the private entity incurs financial difficulties • Involves loss of key revenue streams under parking and cargo privatization 5.4.4 Complexity, Risk, and Implementation Issues Implementing developer finance and operation transac- tions entails more complexity and risk than service contracts and management contracts. Private financing arrangements in the United States context are generally: • More complicated to structure because they must be designed in a way that will satisfy airport revenue bond covenants, federal law and FAA regulations, IRS rules, airline concerns, and local political concerns • Difficult to evaluate relative to public operation • Involve high transaction and procurement costs • Require considerable upfront time to arrange Therefore, private sector development options need to be fairly concrete before they can be evaluated in technical terms and in the context of the airport’s goals and objectives. On the other hand, it generally takes longer to design and bid a facility under airport development than under private development due to the time required to follow government procurement procedures. The magnitude of the time differ- ence depends on the length of the airport’s procurement pro- cess and the experience of the developer. There are certain penalties or hurdles that potentially could add costs or limit the effectiveness of private developer approaches, including but not limited to: (1) compliance with AIP grant assurances and PFC regulations (if used), (2) revenue diversion issues or risks, (3) IRS tax regulations, and (4) bond indenture provisions. Assuming the hurdles can be overcome, the developer will presumably seek a higher rate of return than an airport’s cost of capital in the public market, meaning that for the economics of a business deal to work for both parties, the investor may need to achieve efficiencies. Ways a developer may achieve efficiencies include (1) tax benefits, (2) savings on costs of maintenance and oper- ation of the project, (3) revenue efficiencies, and (4) under certain circumstances more efficient access to capital markets or ability to structure debt more creatively. To structure a developer finance and operation transac- tion, the developer (if not a single tenant such as an airline) typically forms a special purpose company (usually a LLC) in which they hold shares. The first purpose of the LLC is to construct and operate a new project or to re-finance and operate an existing project. The second purpose is to provide lenders a security of payment of interest and principal from a single operating entity. Because lenders have no recourse except against the cash flow of the project or the project assets, the balance sheet of each member of the LLC is protected in the event the project fails. The members of the LLC can walk away from a project if it becomes uneconomical, especially if it is not strategically essential to the business of its members, and the lenders would have no recourse against them. This lack of recourse is a defining characteristic of project finance. Because the LLC is (intentionally) financially weak, it alone will not be able to provide lenders the security they seek. To create this security, a LLC will use a credit enhancement facil- ity for the debt (e.g., municipal bond insurance) and negoti- ate contracts that allocate risk to other entities that are better able and willing to absorb it. The objective is to leave as little risk (pre-construction, construction, and post-construction) in the LLC as reasonably possible in order to provide lenders the security they seek. Airport special facility financings came under well publi- cized attention and reevaluation after court decisions in the United Airlines bankruptcy in 2005 and 2006. United claimed that its leases at San Francisco, Los Angeles, John F. Kennedy, and Denver international airports were not “true” leases but were in substance unsecured loans. As a result, United could reduce its payments to the fair market rental rate for the occupied space and treat the remaining amount of principal on the bonds as unsecured debt.31 The legal agreements sup- porting special facility bond issues determine the rights and security interests of the issuer, the bond trustee, bond insurer, and the airport operator in the event of a bankruptcy by the tenant airline. In very general terms, if the airline’s payment obligations are evidenced in a loan or in a lease that can be 31The bond payments were much greater than the fair market rental rate. The lease at Denver was ruled a true lease by the courts.

40 construed as a loan (often called a disguised financing lease) then the airline can default on the debt. The lease-versus-loan financing distinction is significant because under Section 365 of the Bankruptcy Code “true” leases must be assumed or rejected and the debt must be paid when scheduled, whereas disguised financings often become unsecured claims. Debt under a true lease must be repaid if the company in bank- ruptcy assumes that lease and doesn’t want to risk eviction from its facilities. Even though the airport owners were not legally required to pay debt service on the bonds, there was pressure from the bondholders to evict the airlines and the airline’s access to the premises was restricted. As a result, airline special facility financing of unit termi- nals is likely to have limited application in the future because the rules have changed (since recent airline bankruptcies) and access to capital is more difficult and costly. Some deals are getting done, but they do not have the same economics as they once had. Moreover, there is less certainty now when a deal is started that the financing will be available and affordable. Possible constraints and other considerations for devel- oper finance and operation transactions might include: Economics of the Business Deal • Despite the representations that developers and infra- structure funds are looking for opportunities to invest private capital in airport assets, as discovered in the Boston Terminal A and JFK Terminal 4 case studies, the prospective developers contended that the projects could not be eco- nomically financed without significant access to tax-exempt debt or other airport revenues. The JFKIAT developer esti- mated the tax-exempt financing provided a roughly 30% discount on private financing. • The underlying credit qualities of a transaction are typi- cally weak due to high leverage, narrow diversification of the asset base, and limited revenue streams that make them more susceptible to event risk. It is generally believed that the underlying credit qualities of developer finance trans- actions will need to be stronger now than in the past, which will further challenge the feasibility of such a transaction. The cost and limited availability of bond insurance may contribute to the challenge. The experience of Terminal A at Boston and Terminal 4 at JFK highlight the difficulties of financing terminal buildings, with their high capital and operating costs, without the higher-margin parking and rental car revenues. • Would the management contract oblige the private devel- oper to finance ongoing capital expenditures (a full-service contract)? Such a contract entails more business risk for the developer, which must put up its own cash for mainte- nance and construction with no guarantee that it will fully recover its capital investment. • Despite the potential advantages that developer financing and operation may offer, such transactions are expensive and time-consuming to arrange. The effort may be so great or costly that the airport finds the transaction costs are not worth the benefits. FAA Oversight • Safeguards to preserve the airport owner’s control over the actions of the LLC might affect compliance with AIP grant assurances and PFC assurances (as noted above in Section 5.3). Tax Status (IRS Tax Regulations) • Would a lease of the site/facilities (and potential assign- ment of revenues) affect the tax-exempt status of any out- standing bonds? Bond Indenture Constraints • If the project involves redevelopment of an existing facility, the bond indenture may or may not permit the release of the revenues, and if so, the release might affect the airport owner’s ability to comply with the bond rate covenant. • The lease of site/facilities (and potential assignment of rev- enues) may or may not constitute a sale of airport property under the terms of the bond indenture. If so, the airport owner might not be able to satisfy the covenant necessary to make such a sale. Bankruptcy • Does the lease underlying a special facility bond transac- tion have the characteristics of a true lease or disguised financing? If it appears to be a disguised financing, can the lease be amended and restructured to avoid its adverse characterization? When contemplating a special facility financing on behalf of an airline or other party, an airport owner should be careful to ensure that the lease is a single lease that fits the parameters of a true lease (as opposed to a financing lease). As discussed in the Boston Terminal A case study (in Chapter 9), shortly after the opening of new Terminal A, Delta filed for protection under Chapter 11 of the U.S. Bankruptcy Code. To assist Delta in its reorganiza- tion efforts and to avoid the potential for costly litigation, the Massachusetts Port Authority (“Massport”), with the consent of the bond trustee and bond insurer, agreed to restructure the original lease and bond trust agreement. There was a question as to whether the lease would be deemed a true lease or disguised financing.

41 Other Considerations • Public–private partnerships raise questions about the role of the airport owner and what functions are most appropri- ate for it to perform. The questions revolve in part around who can produce a service or product more economically. A partnership would expose the airport owner to various risks—political, legal, operational, and financial. If the approach fails, the airport owner will be “politically” liable. The early years of the lease were the most vulnerable and the Port Authority played an important role in mitigating risk in these early years. When JFKIAT fell upon hard times after September 11 and SARS, in conjunction with the accel- erated debt amortization period (prior to the extension of the City Lease) and the need for completion financing, the Port Authority stepped up to assist JFKIAT by amending the lease agreement and providing subordinate financing. Although JFKIAT felt it could access financing from the bond market, the financing provided by the Port Authority provided a win-win solution for both parties as JFKIAT received relatively low priced debt at a time when its credit was rated below investment grade. • An airport owner retains the most control over land uses occurring on property that it develops, in particular, the ability to determine initial land uses and the flexibility to change land uses in later years in response to events or shifts in demand. Under private development, an air- port owner’s control of land uses is frozen for the term of the lease unless appropriate protections are incorporated into the lease allowing it to change land uses in later years as necessary. • An airport owner also exercises less control over uses at facilities developed by private developers, and over the quality of the appearance and maintenance of those facili- ties than it does over facilities it develops, unless it includes strong performance standards in the lease. The controls can also be costly to enforce. • The lease should provide for ongoing investments in the asset to addresses concerns about a developer turning back a facility at the end of a long-term lease in poor condi- tion. For example, in the Boston Terminal A lease, Delta was required to make annual maintenance reserve pay- ments so that funds would be set aside for facility reno- vation, renewal, replacement, or reconstruction, and for unusual or extraordinary maintenance or repairs. Funds in the Terminal A maintenance reserve account were avail- able to be dispensed at the discretion of the airport owner (Massport).